Taxes

05/24/2018

Bankman, Joseph and Gamage, David and Goldin, Jacob and Hemel, Daniel Jacob and Shanske, Darien and Stark , Kirk J. and Ventry, Dennis J. and Viswanathan, Manoj, Federal Income Tax Treatment of Charitable Contributions Entitling Donor to a State Tax Credit (January 8, 2018). UCLA School of Law, Law-Econ Research Paper No. 18-02; UC Hastings Research Paper No. 264. Available at SSRN: https://ssrn.com/abstract=3098291 or http://dx.doi.org/10.2139/ssrn.3098291

This paper summarizes the current federal income tax treatment of charitable contributions where the gift entitles the donor to a state tax credit. Such credits are very common and are used by the states to encourage private donations to a wide range of activities, including natural resource preservation through conservation easements, private school tuition scholarship programs, financial aid for college-bound children from low-income households, shelters for victims of domestic violence, and numerous other state-supported programs. Under these programs, taxpayers receive tax credits for donations to governments, government-created funds, and nonprofits.

A central federal income tax question raised by these donations is whether the donor must reduce the amount of the charitable contribution deduction claimed on her federal income tax return by the value of state tax benefits generated by the gift. Under current law, expressed through both court opinions and rulings from the Internal Revenue Service, the amount of the donor’s charitable contribution deduction is not reduced by the value of state tax benefits. The effect of this "Full Deduction Rule" is that a taxpayer can reduce her state tax liability by making a charitable contribution that is deductible on her federal income tax return.

In a tax system where both charitable contributions and state/local taxes are deductible, the ability to reduce state tax liabilities via charitable contributions confers no particular federal tax advantage. However, in a tax system where charitable contributions are deductible but state/local taxes are not, it may be possible for states to provide their residents a means of preserving the effects of a state/local tax deduction, at least in part, by granting a charitable tax credit for federally deductible gifts, including gifts to the state or one of its political subdivisions. In light of recent federal legislation further limiting the deductibility of state and local taxes, states may expand their use of charitable tax credits in this manner, focusing new attention on the legal underpinnings of the Full Deduction Rule.

The Full Deduction Rule has been applied to credits that completely offset the pre-tax cost of the contribution. In most cases, however, the state credits offset less than 100% of the cost. We believe that, at least in this latter and more typical set of cases, the Full Deduction Rule represents a correct and long-standing trans-substantive principle of federal tax law. According to judicial and administrative pronouncements issued over several decades, nonrefundable state tax credits are treated as a reduction or potential reduction of the credit recipient’s state tax liability rather than as a receipt of money, property, contribution to capital, or other item of gross income. The Full Deduction Rule is also supported by a host of policy considerations, including federal respect for state initiatives and allocation of tax liabilities, and near-insuperable administrative burdens posed by alternative rules.

It is possible to devise alternatives to the Full Deduction Rule that would require donors to reduce the amount of their charitable contribution deductions by some or all of the federal, state, or local tax benefits generated by making a gift. Whether those alternatives could be accomplished administratively or would require legislation depends on the details of any such proposal. We believe that Congress is best situated to balance the many competing interests that changes to current law would necessarily implicate. We also caution Congress that a legislative override of the Full Deduction Rule would raise significant administrability concerns and would implicate important federalism values. Congress should tread carefully if it seeks to alter the Full Deduction Rule by statute.

Abstract: No matter how many tax scandals are revealed in the media – and there have been many in the past year, involving a diverse set of taxpayers ranging from Donald Trump to Apple – what is most remarkable is that, by and large, the public has considered them relatively non-scandalous. This was not always the case. During the 1930s, even the most innocuous tax avoidance maneuvers, such as buying tax-exempt bonds, were attacked as morally suspect. When did that change and why? This Article offers a novel attempt to gauge the respectability of tax avoidance – using a unique, hand-collected dataset of newspaper advertisements for tax planning services in prominent national papers between 1930 and 1970 – and concludes that a shift occurred after World War II. The Article then explains the reason for this shift, suggesting that a combination of extremely high rates, a broadened base of taxpayers subject to that rate, and a deterioration of the wartime consensus for the rate structure laid the foundation for the respectability of tax avoidance in the 1950s and 1960s. In effect, just as the high wartime rates for the wealthy had been justified as a means of compensating for the sacrifice of the poor during the war, the pursuit, and tacit approval, of tax avoidance after the war was a means of compensating for the high rates at a time when the sacrifice rationale for them had ceased to be compelling. This history parallels the modern experience with corporate tax shelters and has lessons for those seeking to reform the current tax system.

I had always taken for granted that Judge Learned Hand's view was (and had been) the prevailing one:

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

Gregory v. Helvering, 69 F.2d 809, 810-11 (2d Cir. 1934).

As Bank demonstrates, however, this was not always the case:

During the 1930s, even the use of perfectly legal provisions for reducing income taxes was attacked as morally suspect. There was public outrage when J.P. Morgan and his partners disclosed during the so-called Pecora Hearings – an investigation into the causes of the Wall Street crash and Depression led by the chief counsel of the Senate Committee on Banking and Currency, Ferdinand Pecora – that none of them had paid any income taxes in 1931 and 1932 because of their deduction of capital losses incurred during the crash. In 1936, Treasury Secretary Henry Morganthau characterized even the purchase of tax-exempt bonds by wealthy individuals in 1936 as “moral fraud.” President Franklin Delano Roosevelt blurred the distinction between evasion and avoidance in his 1937 Message to Congress, warning that “the decency of American morals is involved.” As attorney Randolph Paul described the situation in 1937, “[t]here is an echo of the Crusades in the fight against tax avoidance.”

I'm neither a tax lawyer nor a theologian, but this got me to wondering what the Church taught on the subject. After all, I invest in tax-exempt bonds (well, mutual funds holding such bonds) and so on.

Do we see sill see examples of moral condemnation of tax avoidance from Church leaders even today? In 2013, The Guardian reported that:

Cardinal Brady, the head of Ireland's Catholic church, has urged G8 leaders to make good on their pledge to tackle aggressive tax avoidance at a summit later this month, declaring that "paying a fair share of taxes" is a "moral obligation". ...

But as always when dealing with the mainstream media, check their facts. The letter was actually written by 11 heads of national Catholic Conferences, not just Cardinal Brady, and what it actually said was:

The G8’s attention to tax evasion, trade and transparency is equally timely. The Catechism of the Catholic Church teaches: “Submission to authority and co-responsibility for the common good make it morally obligatory to pay taxes...” (No. 2240). It is a moral obligation for citizens to pay their fair share of taxes for the common good, including the good of poor and vulnerable communities, just as states also have an obligation to provide “a reasonable and fair application of taxes” with “precision and integrity in administering and distributing public resources” (Compendium of the Social Doctrine of the Church, No. 355).

I don't see anything there about tax avoidance.

Turning therefore to the Catechism, # 2409 states:

Even if it does not contradict the provisions of civil law, any form of unjustly taking and keeping the property of others is against the seventh commandment: thus, deliberate retention of goods lent or of objects lost; business fraud; paying unjust wages; forcing up prices by taking advantage of the ignorance or hardship of another.

The following are also morally illicit: speculation in which one contrives to manipulate the price of goods artificially in order to gain an advantage to the detriment of others; corruption in which one influences the judgment of those who must make decisions according to law; appropriation and use for private purposes of the common goods of an enterprise; work poorly done; tax evasion; forgery of checks and invoices; excessive expenses and waste. Willfully damaging private or public property is contrary to the moral law and requires reparation.

Number 2240 further states that “Submission to authority and co-responsibility for the common good make it morally obligatory to pay taxes...” (For an argument that tax evasion is not sinful, at least in some cases, see McGee, Robert W., Is Tax Evasion Unethical?. Policy Analysis Paper No. 11. Available at SSRN: https://ssrn.com/abstract=74420 or http://dx.doi.org/10.2139/ssrn.74420)

But tax evasion is not tax avoidance. Tax evasion is the illegal nonpayment or underpayment of tax. In contrast, as Bank explains, tax avoidance "usually involves employing legal maneuvers, sometimes called 'loopholes,' to reduce the amount a taxpayer owes." Does the Church condemn tax avoidance as it does tax evasion?

At this point, I pause to score a cheap debater's point by observing that the Catholic Church avoids a huge amount of taxes by being a nonprofit organization, ranging from income to property taxes. (According to one estimate, the total value of tax exemptions to all religions is on the order of $71 billion per year.) Indeed, the US Catholic Conference itself argued in a 1970 amicus brief filed with the Supreme Court that allowing the Church to avoid paying taxes by granting them these exemptions "is a great bulwark of the American wall of separation, because it both enhances the fiscal separation of Church and State and avoids the imposition of an extremely substantial burden on the free exercise of religion.” Reka Potgieter Hoff, The Financial Accountability of Churches for Federal Income Tax Purposes: Establishment or Free Exercise?, 11 Va. Tax Rev. 71, 113 (1991)

But back to my research.

There are examples in the Bible of tax avoidance. Before David went out to fight Goliath he asked “How will the man who kills this Philistine and frees Israel from disgrace be rewarded?" (1 Samuel 17:26) He was told "The king will make whoever kills him a very wealthy man. He will give his daughter to him and declare his father’s family exempt from taxes in Israel.” (1 Samuel 17:25) So David had--among other reasons--a tax avoidance incentive for fighting the giant.

The Biblical passages on paying taxes, moreover, seem to say that tax evasion is a sin but no more. Saint Paul told the Romans, for example, that they paid taxes because "the authorities are ministers of God, devoting themselves to this very thing." (Romans 13:6) Hence, he exhorted the Romans:

05/29/2017

Some unusual evidence that California's high taxes adversely affect business:

Executives’ compensation has been on the forefront of the public and political debate since the recent financial crisis. One of the measures publicly discussed is a general upper boundary to top management compensation packages (“salary cap”, “maximum wage”). While such measures are novelties to the corporate world, the North American major sports leagues have been using maximum compensation regulations for decades. This paper exploits the 23-year experience with salary cap regulations from the National Football League (NFL). The results show a significant negative relation between the success of NFL teams and the amount of the net (after-tax) salary cap represented by the personal income tax rate of the teams’ home states. A team from California (highest average tax rate) wins 2.256 games less per year and has an 11% reduced probability of making the playoffs than a team located in a no-tax state such as Florida or Texas. The paper contributes to and informs the ongoing public and political debate regarding the regulation of executive compensation, and its effects on the performance of the regulated entities.

Petutschnig, Matthias, Regulatory Compensation Limits and Business Performance – Evidence from the National Football League (May 2017). WU International Taxation Research Paper Series No. 2017-06. Available at SSRN: https://ssrn.com/abstract=2972655

05/01/2017

Last summer the Tax Foundation, a think-tank sympathetic to Republican priorities, estimated that a 15% rate on pass-through income would cost $1.5trn in lost tax revenue over a decade. And there is no evidence that the lower rate would spark enough economic growth to pay for itself, nor that it would spark much growth at all.

The Tax Foundation, like Republicans in Congress, prefers to look at tax cuts through “dynamic scoring”—this year’s assumptions about increased growth become next year’s assumptions about increased tax revenue. Even using this method, the foundation lowered its ten-year estimate for lost pass-through income to a cost of $1.2trn. And that extra $300bn in tax revenue comes from a precarious assumption: that lower taxes will encourage businesses to buy more machines, making workers more productive.

07/21/2016

It doesn’t matter to me whether you’re Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to your fellow citizens, you have a responsibility to pay your taxes. So as Prime Minister, I will crack down on individual and corporate tax avoidance and evasion.

Personally, I stand with US Judge Learned Hand:

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

01/02/2016

I just read about Freedman v. Adams, 2012 Del. Ch. LEXIS 74, at *45-46 (Del. Ch. Mar. 30, 2012) at Taxprof and the original discussion by Prof. Hemel at the Chicago Law blog. It's a good example of a corporate law case, the kind of situation good for an exam, perhaps. Part of it is about whether the shareholder plaintiff should get a million dollars in "legal fees" (quantum meruit would be vastly smaller, another issue) because the directors paid unnecessary taxes by using a thoughtless compensation plan.

06/29/2015

Friday's Supreme Court decision that states must authorize and recognize gay and lesbian marriages could create major legal challenges for religious colleges -- primarily evangelical Christian colleges that bar same-sex relationships among students and faculty members. Or the decision may not create much of a legal challenge at all. Or it may create challenges, but not soon. ...

"Private institutions that dissent from today's reformulation of marriage must be prepared for aggressive legal attacks on all fronts," said Michael W. McConnell, the Richard and Frances Mallery Professor and director of the Constitutional Law Center at Stanford University Law School. ...

Michael A. Olivas, director of the Institute for Higher Education Law and Governance at the University of Houston and author of The Law and Higher Education, said that the Supreme Court ruling should prompt Christian colleges to rethink their policies. "In an area of social change that is as well defined as this issue is, why would any college want to violate the law by banning relationships that are not only legal, but if they led to marriage would be legal and recognizable in every jurisdiction in the country?" he asked

Olivas said that this issue will likely play out as the Bob Jones case did. ...

Olivas said he could see a "small" exemption for seminaries that train clergy, but not for most Christian colleges that train undergraduates and students for a variety of careers other than becoming a member of the clergy. For most religious institutions, he said, they would need to renounce tax exemptions to maintain their policies. "They can't have it both ways," he said.

And thus, thanks to Professor Olivas and his allies in the secular left, religious liberty likely will die a little bit more, so as to force religious colleges to adopt the changing mores of secular elites.

Abstract: A sizable number of US public companies have recently executed “tax inversions” – acquisitions that move a corporation’s residency abroad while maintaining its listing in domestic securities markets. When appropriately structured, inversions replace American with foreign tax treatment of extraterritorial earnings, often at far lower effective rates. Regulators and politicians have reacted with alarm to the “inversionitis” pandemic, with many championing radical tax reforms. This paper questions the prudence of such extreme reactions, both on practical and on conceptual grounds. Practically, I argue that inversions are simply not a viable strategy for many firms, and thus the ongoing wave may abate naturally (or with only modest tax reforms). Conceptually, I assess the inversion trend through the lens of regulatory competition theory, in which jurisdictions compete not only in tax policy, but also along other dimensions, such as the quality of their corporate law and governance rules. I argue that just as US companies have a strong aversion to high tax rates, they have a strong affinity for strong corporate governance rules, a traditional strength of American corporate law. This affinity has historically given the US enough market power to keep taxes high without chasing off incorporations, because US law specifically bundles tax residency and state corporate law into a conjoined regulatory package. To the extent this market power remains durable, radical tax overhauls would be unhelpful (and even counterproductive). A more blameworthy culprit for inversionitis, I argue, can be found in an unlikely source: Securities Law. Over the last fifteen years, financial regulators have progressively suffused US securities regulations with mandates relating to internal corporate governance matters – traditionally the domain of state law. Those federal mandates, in turn, have displaced and/or preempted state law as a primary source of governance regulation for US-traded issuers. And, because US securities law applies to all listed issuers (regardless of tax residence), this displacement has gradually “unbundled” domestic tax law from corporate governance, eroding the US’s market power in regulatory competition. The most effective elixir for this erosion, then, may also lie in securities regulation. I propose two alternative reform paths: either (a) domestic exchanges should charge listed foreign issuers for their consumption of federal corporate governance policies; or (b) federal law should cede corporate governance back to the states by rolling back many of the governance mandates promulgated over the last fifteen years.

There are some very handy deal diagrams that I likely will swipe borrow when I teach Mergers & Acquisitions in the spring semester. There's also a whole bunch of math, which I just sort of skip over the I do those unpronounceable names in Russian literature. But the conclusion seems sound. In any case, highly recommended (even for the math phobic).

08/26/2014

First Lady Michelle Obama will jet off to Omaha, Nebraska, where she'll attend an Obama campaign fundraiser. Hosting the Omaha event (attendees who donate $5,000 can meet and take a photo with the First Lady) will be none other than Warren Buffett, the "Oracle of Omaha," an Obama campaign official told Mother Jones. And joining Michelle Obama and Warren Buffett at the Omaha fundraiser will be Susie Buffett, Warren's daughter and a philanthropist herself.

President Obama turned to Warren Buffett when naming his plan to raise taxes on those earning a million dollars or more a year. And in 2012, Obama has used the so-called Buffett Rule—and Republican opposition to it—as a hammer with which to bash Republicans and as a way to highlight Mitt Romney's support for lowering taxes on the rich. Obama only amped up the criticism after the Senate killed the Buffett Rule in mid-April. ...

President Obama, Vice President Joe Biden, the First Lady, and their allies have repeatedly invoked the Buffett name on their travels around the country to raise money ....

And so today's announcement that Buffett will help finance Burger King's tax inversion is both amusing and illuminating:

Mr. Buffett's Berkshire Hathaway Inc. BRKB +0.34% would invest in the deal in the form of preferred shares, some of the people said. Berkshire is expected to provide about 25% of the deal's financing, one of the people said.

As the WSJ wryly observed this am, "Buffett's inversion play looks awkward for the White House."

What can we infer from this? I must admit at the outset that I'm no fan of Buffett's professed politics (or somewhat odd personal life), so I'm biased and I'd be interested to know what a Buffett fan like Larry Cunningham thinks, but here's my take:

Like a lot of (all?) limousine liberals, Buffett is happy to support tax increases because he knows they won't really affect him. Billionaires can hire as many $1000/hour tax lawyers as they need to run tax avoidance devices--like corporate tax inversions--that are simply unavailable to the middle class. We can't afford their high priced lawyers or their complex strategies, so we get screwed while they get a free pass. Leona Helmsley was right: "We don't pay taxes. Only the little people pay taxes." Buffett's too smart to say so, but ....

Politics is one thing but profit is another. Buffett was perfectly willing to throw both Obama and Buffett's own tax blathering under the bus when it suited him.

Obama's going to need a new favorite billionaire until such time as Buffett makes nice by helping to finance Obama's presidential library.

And a question: Will the Occupy Wall Street types calling for a Burger King boycott now try to boycott Berkshire Hathaway? I doubt it, mainly because I doubt whether they're capable of figuring out what Berkshire Hathaway does.

Berkshire Hathaway’s taxes, at least, will be higher rather than lower as a result of the inversion. Dividends on its $3bn of preferred stock will be taxed at the 35 per cent rate for foreign dividends, rather than the 14 per cent rate that would prevail in the US, according to people familiar with the arrangements. The company will pay an extra $60m a year to the US Treasury as a result.

On the other hand, FT.com is also reporting that:

Mr Buffett is said to have negotiated for a higher dividend to compensate Berkshire Hathaway for the higher taxes.

Plus, of course, Buffett will also benefit to the extent that Burger King's tax savings increase the value of the BK preferred stock he will own. So I think my point stands.

A deal, which could be reached as soon as this week, would mean the iconically American company would be headquartered in Canada, and benefit from the country’s lower corporate tax rate, 15 percent, compared to the on-paper 35 percent rate in the U.S.

Among the comments: "I ate my last BK meal last week. Never again will I grace their doors."

Here's my question for anybody who's upset about tax inversions: Do you have an IRA? or a 401(k)? Did you take any deductions on your tax return last year? or any tax credits? If so, you used a perfectly legal "tax avoidance" strategy. Which is exactly what Burger King is considering.

I stand with Judge Learned Hand who famously opined that:

Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.

Mr. Perkins, the 82-year-old venture capitalist who caused a stir last month when he said in a letter to the editor of The Wall Street Journal that protesters criticizing the wealthy were similar to Nazis, has fully embraced a new role as a spokesman for the beleaguered “1 percent.” In a conversation with a Fortune magazine editor at a San Francisco event on Thursday, Mr. Perkins spent an hour riffing on his position that the wealthiest Americans are being unfairly treated.

One major theme was taxation. Many wealthy businessmen argue that the rich pay too much in taxes. Mr. Perkins goes several steps further.

“The Tom Perkins system is: You don’t get to vote unless you pay a dollar of taxes,” he said at the end of the interview, explaining that he had spent some time formulating this theory. He cited Thomas Jefferson and Margaret Thatcher to provide ideological precedent.

“But what I really think is, it should be like a corporation. You pay a million dollars in taxes, you should get a million votes,” he said. “How’s that?” The remark drew laughter from some in the audience, who apparently thought the investor was joking. In a summary of the event, a Fortune reporter wrote: “Perkins later said offstage that what he meant was that, with 50 percent of registered U.S. voters not paying taxes, ‘we got ourselves into a mess.’”

Perkin's off-the-cuff proposal is a political non-starter, of course, but not without precedent. In the 19th Century, for example, Sweden used a complex system of weighted voting that gave wealthier voters greater voting power than poorer voters. I'd be interested to know how economic and political historians assess that period of Swedish history for growth, fairness, security, order, and so on. (If only I had an intern to put on that research project!)

My guess, however, is that in modern society a system of weighting votes by taxes paid would be a disaster. As I've noted before, I'm a big fan of Jerry Pournelle's The CoDominium science fiction series. In it, as Wikipedia explains:

The United States of the CoDominium Era is a welfare state divided into two classes: Citizens and Taxpayers. "Citizens" are welfare dependents who are required to live in walled sections of cities called "Welfare Islands." People are given whatever they need, including the drugs like Borloi to keep them pacified. There are no limits to how long they can stay on welfare, except that they must live in a Welfare Island. Although people are free to gain an education and work or become a colonist, many citizens did not, preferring to live their whole lives supported by the government. Generally citizens are uneducated and illiterate. Some BuReLoc involuntary colonists are Citizens. By the late CD era, the Welfare Islands were three generations old. "Taxpayers" are the working, educated, and privileged upper class. They carry identification cards to separate them from Citizens.

We need to make sure everybody has skin in the game, not just the top few percent. Everybody ought to vote and everybody ought to pay taxes.

01/28/2014

President Obama will reportedly focus much of his State of the Union speech on addressing inequality and mobility in America. Undoubtedly, these issues will generate a considerable amount of rhetoric by pundits and politicians on both sides of the aisle in the days ahead. Much of this rhetoric will not be supported by data or facts.

In order to bolster this discussion with data, we’ve summarized some of the recent work done on inequality and mobility by the Congressional Budget Office and the IRS. Links are provided to the original source material.

Highlights of these reports include:

Inequality: CBO data shows that inequality today is slightly higher than the average of the past thirty years but less that it was during the last two years of the Clinton administration.

Progressivity: According to the CBO’s progressivity index, the federal tax code is as progressive today as it has been at any time during the past thirty years.

The Top 1 Percent: The top 1 percent continues to pay a larger share of the federal income tax burden than the bottom 90 percent combined.

Redistribution: Using 2006 data, CBO found that tax and spending policies combined to redistribute $1.2 trillion in income from the top 40 percent of non-elderly households to the bottom 60 percent of non-elderly households.

Mobility: IRS panel data that tracked the same group of taxpayers between 1999 and 2007 showed that Americans can move from one economic group to another fairly quickly.

01/21/2014

Mary Willingham deserves a medal. As much as anyone in recent years, the University of North Carolina instructor has helped shed light on how big-time college athletics corrupts academics and robs students of the education they deserve.

Rather than honors, Willingham has received insults and a demotion. Now, in a despicable character-assassination campaign, the powers that be at Chapel Hill are calling her a liar. The situation demands national attention because UNC, widely perceived as a paragon public institution, has become ground zero in the conflict between the industry that is Division One sports and the mission of providing higher education.

As I’ve noted in a series of recent posts (for example, here and here), Chapel Hill offers an especially revelatory example of how higher education suffers under the pressure to keep athletes in the “revenue sports” of football and basketball eligible to play. My dispatches have drawn on three years of investigative work by the News & Observer of Raleigh. ...

This week, CNN added valuable fuel to the fire. The cable network produced an investigative survey showing that at public-university sports powers across the country, dismaying numbers of varsity athletes can barely read or write. UNC played a dubious starring role in the CNN report, and Willingham served as an insider-narrator. She told CNN of one Tar Heel basketball player who couldn’t read or write. Another athlete asked her to teach him to read well enough to follow news accounts of his games.

As non-profit organizations, NCAA colleges and universities are mostly tax exempt. At present, that includes the huge profits that are generated by many big time football and basketball programs (of course, not all are profitable; some are cash sinks dragging down the rest pf the university).

These profits go to support enormous salaries for coaches, bowl game officials, top NCAA executives, athletic department staff, and so on. Sure, at some schools, some pittance goes to support non-revenue sports, but that can't excuse the massive corruption that pervades revenue sports.

Because it is now obvious that college athletics does not advance the exempt educational purposes of colleges and universities, it's time to start taxing college athletics. And subjecting them to antitrust klaws and all the other regulations that other business must comply with.

09/10/2013

A legal opinion, prepared by law firm Farrer & Co, was published today by the Tax Justice Network: see here (pdf). A copy has been sent to the chief executive of every company in the FTSE100. The opinion considers - and rejects - the view that company directors are subject to a fiduciary duty to avoid tax. Indeed, it states that the "... idea of a strictly 'fiduciary' duty to avoid tax is wholly misconceived ...[and] ... It is not possible to construe a director's statutory duty to promote the success of the company [undersection 172 of the Companies Act 2006] as constituting a positive duty to avoid tax."

As a US lawyer, of course, the more interesting question for me is whether the business judgment rule would protect a board decision to minimize corporate taxes and/or a board decision not to do so. As I read the US cases, the answer is that the BJR would in fact protect either decision from judicial review:

(1) Whether board approval of a supplemental retirement bonus was a breach of fiduciary duty to the extent that it constituted waste and did not qualify for a tax deduction; and (2) Whether a stock option plan for the directors was self-interested and not entitled to the benefit of the business judgment rule.

Francis explains that the court answered those questions as follows:

(1) The Court found a failure to plead demand futility and dismissed the waste claim, and the Court found that Delaware law did not impose a fiduciary duty, per se, to minimize corporate taxes, thus rejecting a related tax argument about the deductibility of the compensation paid to a retiree; (2) The Court found also, however, that the stock option plan for directors did not have sufficient limitations despite shareholder authorization, and therefore, could be considered self-interested and not entitled to the benefit of the business judgment rule.

...

It reminds me of a New York case, Kamin v. American Express, in which AmEx shareholders challenged the board's decision to structure the disposition of shares Am Ex owned in a firm called Donaldson, Lufken and Jenrette as a dividend of property to the shareholders rather than as sale on the market:

... the complaint alleges that in 1972 American Express acquired for investment 1,954,418 shares of common stock of Donaldson, Lufken and Jenrette, Inc. (hereafter DLJ), a publicly traded corporation, at a cost of $ 29,900,000. It is further alleged that the current market value of those shares is approximately $ 4,000,000. On July 28, 1975, it is alleged, the board of directors of American Express declared a special dividend to all stockholders of record pursuant to which the shares of DLJ would be distributed in kind. Plaintiffs contend further that if American Express were to sell the DLJ shares on the market, it would sustain a capital loss of $ 25,000,000 which could be offset against taxable capital gains on other investments. Such a sale, they allege, would result in tax savings to the company of approximately $ 8,000,000, which would not be available in the case of the distribution of DLJ shares to stockholders.

The court held that the business judgment rule protected the directors' decision from judicial review. The parallel to the Seinfeld case is readily apparent, of course.